FINRA Alerts Advisers on IRA Rollover Conflicts of Interest

Concerned about the potential conflict of interests involving individual retirement account rollovers, the Financial Industry Regulatory Authority has issued an alert putting financial advisers on notice to review their practices to ensure they are not crossing into gray areas.

Specifically, FINRA urged broker-dealers to supervise their activities to reasonably ensure that conflicts of interest do not impair the judgment of a registered representative or another associated person about what is in the customer's interest, the guidance read. The December alert also reminded investment representatives to neither confuse investors nor interfere with important educational efforts.

The potential for conflicts of interest run the gamut. For instance, an investment adviser who recommends an investor roll over plan assets into an IRA may earn an asset-based fee as a result, but no compensation if assets are retained in the plan, FINRA said. A financial adviser then has an economic incentive to encourage an investor to roll plan assets into an IRA that he will represent as either a broker-dealer or an investment adviser representative.

Conflicts also may exist for firms and their associated persons that are responsible for educating plan participants about their choices. For example, if an associated person receives compensation for the number of IRAs that participants open at his firm, he or she has an incentive to encourage participants to open IRAs rather than maintain their assets in their plan, according to the FINRA guidance.

For credit unions and other financial institutions, to ensure there are no conflicts of interest on IRA rollovers, the problems can be complex, said Leon LaBrecque, senior financial adviser and CEO of LJPR LLC, an independent wealth management firm based in Troy, Mich., that manages $626 million in assets.

Plan participants are typically in no-load options that are carefully screened by a plan consultant or administrator under a fiduciary standard, LaBrecque told Credit Union Times. Often, referred parties are selling commission-based products, some of which have illiquidity and significant costs, he added.

“We’ve seen IRA rollovers with over 25% in illiquid private REITs that can't be sold and have depreciated substantially,” LaBrecque explained. “Similarly we’ve seen cases where annuity products are sold on a captive basis, where a better product is available through another provider, but a higher fee product is recommended and sold. This problem carries over to creating a suitable portfolio for a retiree.”

Retirees may have been in target-based no-load funds or a qualified professionally managed plan at a 60/40 equity/fixed mix, and then are placed into an 80% equity portfolio, LaBrecque said. “The conundrum is how credit unions and other institutions are expected to take these risks into account. Possible solutions include some form of checklist or due diligence on recommended providers, or a disclosure statement to credit union (members) relating to the situation,” LaBrecque suggested, adding another possible path may be using fiduciary-based advisers, who meet a fiduciary standard.

“A looming question will be how the credit union or other institution views the customer, in a broker sense – suitability, conflicts of interest and fair dealing issues – or the fiduciary sense,” LaBrecque said. “Overall, the myriad of regulatory and taxation issues make for a new set of issues to be addressed in retiree customers.”

In July 2012, FINRA said it launched its conflicts initiative to review firms’ approaches to conflicts management and to identify effective practices. Based on firms’ responses to FINRA's conflicts review letter, in-person meetings and a follow-up compensation questionnaire to develop certain observations, the regulatory agency was able to come up with a myriad of potential conflicts of interest in a number of areas including IRA rollovers.

One of the benefits of a credit union utilizing a third party broker-dealer, is that the broker-dealer is responsible for adhering to securities laws such as those promulgated by FINRA, said Tim Halevan, vice president and chief compliance officer for CUNA Brokerage Services Inc. in Madison, Wis. As with all FINRA rules or guidance, the broker-dealer that is delivering the financial services program and working with the member will have the appropriate policies and procedures in place to meet any rules FINRA enacts, Halevan noted.

He said it should be noted that some of what FINRA discussed in its December communications was more guidance than actual rule-making. As far as FINRA rules in general, CUNA Brokerage has a program of supervision in place to ensure members are receiving the disclosures and advice that FINRA requires from those advisers that work with CBSI, he pointed out.

“We do this not only to meet the rules of the regulator, but also because it is the right way to do business with our credit union partners and their members,” Halevan said.

After performing proper fact-finding and due diligence, Halevan said advisers most certainly can suggest a member seek out a credit union person to help with an IRA. In addition, the adviser may believe, after performing the proper diligence, that he or she may have some options for the member as well.

“Remember, an IRA is simply an umbrella, or a name of a certain type of qualified account for retirement savings. It's what goes inside the IRA account that matters a great deal,” Halevan said. “What type of investment such as a CD or a mutual fund or an annuity might serve the member in order to help them meet their financial goals – that's when it is important to determine who can help the member.”

If a CD is the better option, for instance, the adviser might suggest the member speak with someone at the credit union outside the financial services program, Halevan said. If maybe a mutual fund or an annuity is more appropriate, the adviser may have these options to discuss with the member.

The IRA rollover market is a huge space for investments to move. One in 10 with at least $100,000 in investable assets is likely to roll over a total estimated $280 billion into IRAs in 2014, according to Investor Rollover Assets in Motion, a Cogent Reports study from Market Strategies International.

While key life events such as changing employers and retiring remain the top triggers for initiating a rollover transaction, investors who are likely to roll assets report that their top criteria when selecting an IRA rollover provider are low fees and expenses, followed by an easy process, brand reputation and having an existing relationship with the financial services company.

“Opportunities exist in this very competitive market for the providers who acknowledge investor fee sensitivity and make it easy, especially for existing customers, to transfer idle retirement plan assets into a Rollover IRA,” said Julia Johnston-Ketterer, senior director and author of the Investor Rollover Assets in Motion study.

According to FINRA, IRAs account for about 28% of all U.S. retirement assets, which totaled $19.5 trillion at the end of 2012. Of this amount, IRA assets were $5.4 trillion, compared with $5.1 trillion in defined contribution plans and $9 trillion in other retirement plans. Approximately 98% of IRAs with $25,000 or less are brokerage accounts.